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How Taxes Affect Your Credit Score

Understanding how paying or not paying your taxes can impact your credit score is crucial. While taxes themselves don’t directly influence your credit score, the methods you use to pay them and the consequences of not paying can have significant effects.

Paying Taxes with a Credit Card

Using a credit card to pay your taxes can be a viable option in certain situations. If your card offers an introductory 0% APR, you can pay off the balance without accruing interest. However, be cautious as this can lead to a hard inquiry on your credit report, potentially lowering your score temporarily. Additionally, high balances can increase your credit utilization ratio, which can negatively impact your score.

Paying Taxes with a Personal Loan

Another option is to take out a personal loan to cover your tax bill. Personal loans often have lower interest rates compared to credit cards, but they may come with origination fees. Like credit cards, applying for a personal loan can result in a hard inquiry and lower the average age of your credit accounts, which can affect your score. However, timely repayments can help improve your credit over time.

IRS Payment Plans

The IRS offers short-term and long-term payment plans for those who can’t pay their taxes in full by the deadline. These plans come with low or no fees and interest rates that are often lower than those of personal loans. Importantly, IRS payment plans do not require a credit check and do not affect your credit score.

Consequences of Not Paying Taxes

Failing to pay your taxes can lead to severe repercussions. The IRS may impose penalties and interest on the unpaid amount, levy your bank accounts, or place liens on your property. These actions can indirectly affect your credit by increasing your debt-to-income ratio and making it harder to qualify for new loans.

Compare Your Options

Before deciding how to pay your taxes, consider all your options. IRS payment plans are often the best choice if you can’t pay your tax bill in full. However, if you opt for a credit card or personal loan, be aware of how these choices can impact your credit score.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you navigate your financial options and find the best solution for your needs.

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